Sharon G. Harrison

Chaos, Sunspots, and Automatic Stabilizers

We study a one-sector growth model which is standard except for the presence of an externality in the production function. The set of competitive equilibria is large. It includes constant equilibria, sunspot equilibria, cyclical and chaotic equilibria, and equilibria with deterministic or stochastic regime switching. The efficient allocation is characterized by constant employment and a constant growth rate. We identify an income tax-subsidy schedule that supports the efficient allocation as the unique equilibrium outcome. That schedule has two properties: (i) it specifies the tax rate to be an increasing function of aggregate employment, and (ii) earnings are subsidized when aggregate employment is at its efficient level. The first feature eliminates inefficient, fluctuating equilibria, while the second induces agents to internalize the externality.

Balanced-budget rules and macroeconomic (in)stability

Abstract It has been shown that under perfect competition and constant returns-to-scale, a one-sector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced-budget rule with a pre-set level of government expenditures. This paper shows that indeterminacy disappears if the government finances endogenous public spending and transfers with fixed income tax rates. Under this type of balanced-budget formulation, the economy exhibits saddle-path stability and equilibrium uniqueness, regardless of the source of government revenue and/or the existence of lump-sum transfers.

Indeterminacy in a model with sector-specific externalities

Abstract I examine a model with two sectors of production: consumption and investment. In the model, indeterminacy of equilibria results due to the presence of small sector-specific externalities in production. In fact, I find that indeterminacy results with a certain, minimum value of the externality in the investment sector, even with no externality in the consumption sector. I find that the indeterminacy properties of the model vary, depending on the form of the utility function. For example, with utility that is logarithmic in consumption, these properties are completely independent of the value of the externality in the consumption sector.

Returns to Scale and Externalities in the Consumption and Investment Sectors

Using data on US manufacturing, I estimate internal returns to scale and external effects for the consumption and investment sectors. I construct panels of data at the industry level and use results of gross output production function estimation to derive implied estimates in a value added specification. For the investment sector, returns to scale appear to be slightly increasing, with evidence of a positive external effect. For consumption, the evidence indicates decreasing to constant returns to scale. I discuss the implications of these results for the empirical plausibility of indeterminacy in recent multi-sector models of the business cycle. (Copyright: Elsevier)

Tracing externalities as sources of indeterminacy

Abstract This paper offers further inquiry into sources of indeterminacy in general equilibrium. We take a more agnostic approach than previous work as we allow for a more general interpretation of externalities. In particular, we identify the origin of scale economies as being from either labor or capital. We find that in the one-sector model it is primarily the externalities associated with labor that generate the result. However, in the two-sector model, indeterminacy can be ultimately traced back to the externalities from capital in the investment sector.

Indeterminacy with capital utilization and sector-specific externalities

Abstract We show that the minimum level of increasing returns-to-scale needed for indeterminacy in a two-sector real business cycle model with variable capital utilization and sector-specific externalities is extremely small. Moreover, this value is lower than that required in several of our model’s predecessors, and is quite easily within the range of empirical plausibility.

Indeterminacy in a model with aggregate and sector-specific externalities

Abstract We present a two sector dynamic general equilibrium model with both sector-specific and aggregate externalities. We find that including the aggregate effects allows for a trade-off between the sizes of the two types of externalities needed for indeterminacy.

Indeterminacy with No-Income-Effect Preferences and Sector-Specific Externalities

We examine a two-sector real business cycle (RBC) model with sector-specific externalities in which household utility exhibits no income effect on the demand for leisure. Unlike in the one-sector counterpart, indeterminacy can result with sufficiently high returns-to-scale in the investment sector. Moreover, the smaller the labor supply elasticity, the lower the level of externalities needed for indeterminacy. This finding is the opposite of that in all existing RBC-based indeterminacy studies. Finally, in contrast to previous sunspot-driven two-sector RBC models, our economy is able to match the stylized facts that sectoral labor inputs are positively correlated and consumption is procyclical.

SUNSPOTS AND CREDIT FRICTIONS

We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumerÂi¯s choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features.

ASSET PRICING IN DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODELS WITH INDETERMINACY

We explore asset pricing in the context of the one-sector Benhabib-Farmer-Guo (BFG) model with increasing returns to scale in production and compare our results with financial implications of the standard dynamic stochastic general equilibrium (DSGE) model. Our main goal is to determine the effects of local indeterminacy and the presence of sunspot shocks on asset pricing. We find that the BFG model does not adequately represent key stylized facts of U.S. capital markets and does not improve on the asset-pricing results obtained in the standard DSGE model.